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IRS Gives a Little on Air Taxi Tax

The IRS has given a sliver of ground in how it has applied tax rules to air taxi flights. Sen. Mark Begich is calling it a win for small air carriers, but Joy Journeay, executive director of the Alaska Air Carriers Association, says the concession is less than it appears.

“It is not clear at this time that it is going to help anyone,” she said.

The association has said the rules were unclear on when a small plane operator has to collect federal excise taxes from passengers. Several air taxi businesses say they didn’t know they were supposed to collect the money until they were audited and hit with tax bills that, in some cases, exceeded a million dollars. The IRS last week wrote a letter to Begich saying it will refund any excise tax air services paid for day tours. The IRS letter doesn’t say whether it will also refund the penalties and interest audited businesses had to pay, and an IRS spokesman said the agency didn’t want to talk about its decision. But the letter says the agency is only lifting the tax retroactively. Next month it will apparently revert to its previous interpretation of the rules, which Journeay called baffling.

“The letter issued to Sen. Begich from the IRS doesn’t clear up any of the ambiguous language in the regulations or address any of the items that the Alaska Air Carriers have asked them to address for multiple years,” she said.

The IRS has previously said whether the tax applies to a day trip depends in part on the purpose of the trip. If the passengers deplane to see a glacier or watch bears, the air service doesn’t have to collect the tax, but if they land to fish, that might be taxable, if the pilots fly to the same places with some degree of regularity. The way the agency has defined regularity has also exasperated air carriers.

Journeay says as she reads the letter, the refund only applies to carriers that already paid the tax. For years, even attorneys and tax accountants advised air carriers the excise tax didn’t apply to their small planes, Journeay says. She notes small carriers would still pay a tax to the federal government in the fuel they buy.

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